Getting the best rate on your mortgage is important and can save you a ton money over the life of the loan. Over the life of a 30-year mortgage, the interest paid alone can amount to almost as much as the cost of the home you are buying, depending upon the rate and other factors.
With the changes in the tax rules that preclude many home buyers from fully deducting the interest and property taxes associated with their home, its more important than ever to get the best rate and overall terms possible on your mortgage.
Here are some tips on getting the very best mortgage rate in 2020:
Improve Your Credit Score
Your credit score is one of the most important considerations in getting a low mortgage rate. A low credit score and a credit report littered with derogatory marks will likely lead to a rejection for pretty much any type of mortgage. A high credit score, however, will increase your options and allow you to secure the best rates.
Lenders may look at FICO Score or VantageScore to calculate your credit score. It doesn’t really matter which one they choose. The only thing that matters is that your credit report is clean, your payment history is unblemished, and you have a high credit utilization ratio.
If your credit score is weak right now, then start making some changes to ensure it’s stronger when you need it. Some loans, including FHA loans and VA loans (offered by the Federal Housing Administration and Veterans Association respectively), will allow you to secure a mortgage with a higher credit score, but you may pay a higher interest rate and your options will also be limited.
If you have a friend or family member with a credit card account that has been open for a while with positive payment history. Have them add you to their account as an authorized user. When you’re added onto the account all of that accounts history will appear on your credit report. Authorized user accounts are figured into the scoring algorithm and will increase your scores. You do not even have to have your own card, the account owner can also just remove you as an authorized user after you close on your home.
Lower Debt to Income Ratio
Lenders want your mortgage payment to be 28 percent of your monthly gross income. All household debt—mortgage, property taxes, private mortgage insurance, and home insurance—shouldn’t be more than 36 percent of your gross income.
If yours is higher, you can get a better mortgage rate by applying for a smaller loan. Focus, too, on paying off that other debt and, if possible, take steps to increase your income.
Be sure to pay off credit-card balances every month so that your debt levels don’t rise further, and don’t take on new loans or open new credit card accounts. If you do, the credit card issuer will do an inquiry into your credit history, and that can hurt your score.
Save for a down payment (plus a reserve).
When taking out a mortgage, you’ll pay a certain percentage of the home’s value upfront. This is called a down payment.
While you may be approved for a mortgage with a down payment of less than 20 percent (FHA loans allow for down payments as low as 3.5 percent, for example), a down payment of less than 20 percent is typically considered more risky to lenders.
On the other hand, a down payment of 20 percent or more could help improve your mortgage rate by an eighth of a percentage point to as much as half a percent. It can also help you avoid having to pay for private mortgage insurance (PMI), which protects the lender if you stop making your mortgage payments. Borrowers are typically required to pay for PMI when they get a loan with a down payment that’s less than 20 percent.
It can be hard to save for a 20 percent down payment, especially if you’re trying to pay down debt at the same time. After all, a 20 percent down payment on a $250,000 house is $50,000 — not an amount everyone can easily set aside.